Bailout Schmailout

This is a copy of the email message I just sent my Congressman, Ciro Rodriguez of Texas.

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Congressman Rodriguez,

First, thank you for representing me. Though I'm disappointed you voted against the 'bailout', I still appreciate your efforts in Congress.

I don’t usually do this, but I’m sending this because it’s important to know what’s really happening today. The ‘bailout’ package just failed to pass Congress, which is bad news for America and for our paychecks in particular. The problem is that most Americans don’t understand that the ‘bailout’ shouldn’t be called a ‘bailout’ – it’s really a shrewd investment that Congress should make. I’m against rich bank executives getting a bailout as much as anyone, but that’s not what the ‘bailout’ would do and the stakes here are just too high. If you don't vote for this ‘bailout’, things could just become worse!

The article by John Mauldin entitled "Who's Afraid of the Big Bad Bailout?" (http://www.frontlinethoughts.com/article.asp?id=mwo092608) does a really good job of describing why. Before I read this, no one had adequately described exactly what the ‘bailout’ is and why it should help protect us from a depression (yes, depression with a ‘d’, as in the Great Depression). There’s a lot of techno-financial terms in the article, so I summarized it this way …

1. Banks can only lend to consumers and investors at about 12 times their capital base (value of their assets).

2. Mortgage securities on the bank’s books are now worth much less, so banks have to mark down the value of their capital base, which means they can’t lend as much as they are currently.

3. In order for banks to meet lending regulations, they have to raise capital (get cash) by selling bonds so that their lending to capital ratios will balance. The other option is for banks to call in loans, and I sure don’t want my bank calling in my mortgage, do you?

4. No one in the market wants to buy bank bonds right now because the market is in a panic.

5. Bank bonds are now selling for something ridiculous like 53 cents on the dollar (read ‘ON SALE!’).

6. The ‘bailout’ would simply buy truckloads of these bonds, giving banks cash and stabilizing the market.

7. BANKS ARE STILL HELD ACCOUNTABLE. Banks would still need to pay back the bonds (the ones the government wants to buy at 53 cents on the dollar). The government could also turnaround and later sell these bonds for a profit!

8. Even if half the banks go on to fail, the government would still get a sizable return on the bonds. Remember that if a company (bank) fails, lenders (bond holders – the government) gets the remaining assets first, and stockholders (bank owners) last. This broad portfolio of bank bonds is a pretty safe investment for the government to take.

9. If the government doesn’t buy these bonds, the credit market will likely freeze and the company I work for may not be able to get the funds it needs to cut my next paycheck. No one wants that, right?

10. Tell Congress to think like shrewd investors for once!

Thank you for representing me.

Best regards,
Nate Barber